4:49 am

Tue October 9, 2012

Gobal Economy Outlook Looks Grim

Finance ministers and central bankers from around the world are on their way to Tokyo for their annual get-together, sponsored by the International Monetary Fund and World Bank. The mood, at the moment, about the global economy, is worried. In fact, the IMF has just called the risk of a worldwide slowdown alarmingly high.

To find out more, we turn, as we often do, to David Wessel. He's economics editor of The Wall Street Journal.

Good morning.

DAVID WESSEL: Good morning, Renee.

MONTAGNE: Now that's rather unsettling, David, those words. What is it that's caused the IMF to sound the alarm and isn't - I mean isn't the financial crisis behind us now?

WESSEL: Well, we hope so. The world economy bounced back after a very deep recession in 2008 and 2009 - 2010 was actually a reasonably good year for global growth. But as you point out, in its New World Economic Outlook, which the IMF released in Tokyo yesterday, it said that its forecast is even gloomier than the kind of gloomier one it put out in July. It said the recovery - as it put it - remains tepid and bumpy, and it says no significant improvements appear in the offing.

In the rich countries, like the U.S. and others, growth is too slow to make a substantial dent in unemployment - which remains very high. And this lousy growth in the rich countries of the, U.S. and Europe and Japan is depressing exports from developing countries, like China and India, which at the same time are suffering from a slowdown of their own consumer demand.

And it's not just the IMF. There's, for instance, a gauge that the Brookings Institution and Financial Times puts out that purports to predict global growth and they said that they see slowing momentum all across the world economy - both developed and emerging markets.

And the thing that I found most alarming is that what the IMF is saying is growth this year will be lousy, worse than last year and next year will only be a tad better, even if Europe gets its act together, and even if the United States avoids this fiscal cliff of spending cuts and tax increases that are due at the end of the year.

MONTAGNE: Well, this is all very depressing, David. What has...

WESSEL: Sorry. Just the facts, ma'am.

MONTAGNE: What has brought the world to this? I mean we hear a lot about lots of downturns everywhere, but what particularly has gone wrong?

WESSEL: Well, the International Monetary Fund, sort of, has a three-part diagnosis. One, it says a lot of big countries are pursuing government austerity at the same time, and that's reducing global demand for goods and services. In fact, the IMF is, kind of, critical itself and of global government saying that maybe this effort to reduce deficits has been too much too fast and it's hurting growth. Secondly, the global financial system, while better than it was during the crisis, isn't yet healthy in a lot of countries and that makes it hard for people and businesses to borrow in some places. And then the third factor is what the IMF calls a general feeling of uncertainty that's weighing down the world economy. In fact, the bright spot in this forecast says if this uncertainty dissipates, maybe they'll be an unexpected but welcome up-tick in growth.

MONTAGNE: What other aspects are there that would be a remedy for this?

WESSEL: Well, in a way that's another worrisome part of this kind of worrisome forecast. Four years ago, world governments cut taxes and increased spending - and the central banks cut interest rate very low. But some of the governments are now tapped out, like Spain and Italy, they can't really increase their deficits to propel growth and the politics in some of the big countries that might be able to increase deficits - namely the U.S. and Germany - are standing in the way. And the central banks - though still trying - simply may not have the tools needed to give the economy the jolt that would be required to get growth growing again.

In particular, the IMF is worried about what it called the deepening of the crisis in Europe. It said that's the most immediate downside risk - that the action will be insufficient or delayed or prolonged, and that will make things worse, not only for Europe, but you are what it called deleterious consequences for the whole world economy.

MONTAGNE: And I would imagine in a few seconds that we've got left, that you can have a couple word answer to the U.S., its fiscal cliff looming. The IMF, probably worried about that too.

WESSEL: Yeah. The IMF basically said the U.S. should avoid the fiscal cliff. Congress should avoid it, to not have the big tax increase and spending cut at the end of the year. But it did say the growth in the U.S. this year and next - though sluggish - will be better than any of the other major advanced economies.

MONTAGNE: David, thanks very much.

WESSEL: You're welcome.

MONTAGNE: David Wessel, economics editor of The Wall Street Journal. Transcript provided by NPR, Copyright National Public Radio.